As Detroit emergency manager readies fix-it plan, hard work ahead

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Published May 12, 2013

| Reuters

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DETROIT – Six weeks into his work as Detroit's emergency manager, former bankruptcy lawyer Kevyn Orr has found the city's finances in worse shape than expected, with long-term debt at $15 billion, $2 billion worse than figures disclosed before he took the job.

The city has set aside far less than expected for retiree healthcare benefits, too. A report from Michigan State University in March stated that Detroit has $4.9 billion of unfunded benefit liabilities. But Orr's review has found the shortfall actually is $5.7 billion, 16 percent higher than expected, according to Orr's spokesman, Bill Nowling.

Orr will address the city's finances Monday when he delivers a report to the state. He is expected to report on Detroit's projected budget deficit and pension underfunding, too, but Nowling would not discuss details of those items.

Orr, who previously worked on the restructuring of U.S. automaker Chrysler LLC, has sweeping powers as emergency manager to deal with a city where the population of 700,000 is a fraction of its 1950s peak of 1.8 million people. Detroit has difficulty providing adequate policing and basic services like street lights and working fire equipment.

After maintaining a low profile since being appointed, Orr will give his first public indication of how bad the problem is, and how he hopes to fix it. The findings to be delivered to the state of Michigan will come from a detailed financial review he has conducted since he stepped in as emergency manager.

"If we keep going down this path, there are only dragons," said Nowling. "There are no more corners to cut or one-time fixes to make. We have to make some really, really major restructuring decisions, and it has to happen quickly."

The stakes are high for Orr and his credibility. After arriving with much fanfare, and amidst some controversy over the state takeover of Michigan's biggest city, Orr has worked mostly behind the scenes, developed a rocky relationship with Mayor Dave Bing and the city council, and moved more cautiously on cost-cutting and infrastructure improvements than many observers had expected.

Orr is required to deliver a plan for tackling the city's annual $100 million deficit on Monday in order to meet a deadline set by the Michigan state law that allowed Republican Governor Rick Snyder to put him place in late March.

The scale of problems is so great that Orr's office has warned that there are limits to what he can offer this early on.

"I would be enthused but surprised if we see anything in terms of details" from Orr, said Patrick O'Keefe, chief executive and founder of turnaround specialists O'Keefe and Associates Consulting LLC, which is based in the Detroit suburb of Bloomfield Hills. "All we're going to see is the foundation and an outline of the issues that are going to be tackled."

Orr's deliberate approach contrasts with the tone he set at the start. In an interview with Reuters just days after his appointment, he raised the prospect of a bankruptcy filing.

"Let's get at it and work together because we can resolve this (as) people of good faith," Orr said. "Don't make me go to bankruptcy court."

DELICATE TASK

As an unelected official, tasked to guide the turnaround of a heavily Democratic city by a Republican governor, Orr faces a politically delicate task. So far, restructuring and bankruptcy specialists say Orr has struck the right tone resisting temptation to use broad powers that would allow him to remove the elected city council and Mayor Bing from the city payroll.

"Orr has at least tried to keep them involved," said Douglas Bernstein, a Bloomfield Hills-based attorney who specializes in commercial and municipal bankruptcy. "Whether or not he listens to them is another matter."

Bing has complained publicly about being ignored, but in an email to Reuters, he said their relationship "continues to evolve."

"We are meeting more regularly and continue to exchange thoughts and ideas on various issues," he wrote.

Orr does seem to listen to consultants, who have been paid $13 million by the city in the last six months. Orr has continued to rely heavily on consultants, and drew some criticism for his decision to approve the hiring of his former law firm, Jones Day, for legal advice.

"My concern is that we've brought in all these consultants and I'm not sure it's entirely clear to anybody exactly what they're doing and who's monitoring them," said council member Kenneth Cockrel Jr.

But bankruptcy attorney Bernstein said the use of consultants was "absolutely necessary" because while the city is obliged to produce a balanced budget, for years its projections of revenue and spending "have not been based in reality."

UNION NEGOTIATIONS

By all accounts, though, Orr has barely begun on the work he must complete if he is to succeed during an expected term of 18 months on the job. He will have to negotiate concessions with the city's 48 unions and decide how extensively to cut services or city payroll. He also must negotiate with bondholders who are uneasy over Detroit's fiscal instability.

Union leaders described meetings with Orr as cordial but no-nonsense. Orr has made clear his intent to impose new labor contracts. "We had a nice conversation, but that's not going to get us a negotiated contract," said Dan McNamara, president of the Detroit Fire Fighters Association.

Still, labor unions will have limited options. The state law does not require Orr to negotiate with unions or even participate in arbitration proceedings, and Orr has filed official notice that he may exercise those rights.

Labor costs will be a rich target, said Joseph Harris, former emergency financial manager for Benton Harbor in western Michigan. Harris has studied the cost of police, and firefighters in comparable cities - Milwaukee, Atlanta, Cleveland, St Louis and Pittsburgh - and found Detroit is more expensive in every key metric: cost per capita, cost per square mile and cost per police officer and firefighter.

"Even if Detroit was to spend the average of what its peers do, the city could save $200 million a year," he said.

Turnaround specialist O'Keefe said Orr has kept a surprisingly low profile, but that this may be necessary because talks with the city's unions are so sensitive.

"It is slow going with the unions because they are worried that if they make the first deal (with Orr) it's going to be the worst deal," O'Keefe said.

Orr also faces structural problems that must be addressed. Cutting city services in itself is not an effective long-term strategy, O'Keefe said. "The real issue is what to do about the long-term debt and legacy costs that are staggering," he said.

Nowling, Orr's spokesman, said the debt threatens Detroit's ability to deliver basic services. "If the city stopped providing services and did nothing but pay off its debt, it would take the city 15 to 20 years to eliminate the debt," Nowling said.